Broadridge Financial Solutions, Inc. (BR) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. We'll go ahead and get started. For those of you who do not know me, I'm Patrick O'Shaughnessy, Capital Markets Technology analyst here at Raymond James. And up next, we have Broadridge, and on their behalf we have CEO, Tim Gokey. Tim, thanks for joining us.

Patrick. Great to be here today. Thank you very much.

Of course. Maybe you could just kick it off. We have a lot of portfolio managers and generalists in the room. Maybe just give a brief overview of Broadridge and kind of what makes Broadridge special.

Implying portfolio managers no less. So yes, let me just take a minute to say a little bit about Broadridge. We are a scale technology provider at the intersection of capital markets, wealth management, serving public companies. And we serve our clients really at the -- between operations, technology, governance and communications. We are about a $24 billion market cap company with about $4 billion in revenues. The market we serve is about $60 billion. That's up from $46 billion 3 years earlier, so it's a growing market, and we think it gives us a really good long runway for growth. We have shown consistent growth. If you look over the past 10 years, our recurring revenue growth has been on the order of 10%. Our adjusted earnings growth has been on the order of 14%. With that, we've delivered really nice top quartile shareholder returns. And we think that consistency of performance is something we can continue for the future and something that should give you all confidence in what we can deliver for shareholders. Now that is based on, I think, a very interesting network business model that really connects all the different stakeholders in our arena. So we serve nearly every broker dealer. And through that, we have a service relationship with every mutual fund, every individual investor, every public company, every institutional investor. And when we look at what we do with all of that last year, we provided communications and took back votes for $800 million different -- separate equity positions. We delivered $7 billion, mostly digitally, but also for a number physically $7 billion regulatory and customer communications. And we cleared and settled $10 trillion in trades every day. So it's a powerful position sort of behind the scenes at the center of financial services. And really through that, it gives us enormous domain expertise and some really complex and our arcane areas that are less differentiated for our clients and therefore, really good candidates for mutualization and for using a third party to invest and do it better than they would be able to do for themselves. Now we are -- that sort of business model, we think when you look at the future growth is being driven by 5 trends. The ongoing democratization of investing, which is really more products, more investors at lower cost. The continued digitization of communications, clearly important ongoing trend. The acceleration of trading from T+1, the T+ who knows what. I want to get to a T-1, let me know. The increasing importance of data and AI and, of course, ever-changing regulatory. And so those trends are things that we see really playing out. We have structured our business and aligned our business over the past -- it's an ongoing process. But over the past 10 years to align with helping our clients solve the opportunities and challenges that are created by those trends. And we've done that across our 3 core franchises of governance communications, capital markets and wealth and investment management. And let me just take a moment on each of those. So governance Communications is our largest franchise, about $2.5 billion in fee revenue. If you look at the past 5 years, a 5-year growth rate of about 9%. And in recent years, that business, we have doubled the number of positions that we are supporting. And we're investing really in digitization and innovation to extend that growth out over the long term. As we think about going forward, we're going to continue to invest to support the continued democratization of investing in digitization of communications. We're going to support continued position growth by really innovating in the government space as we have with a Vote of Choice, which is becoming a bigger thing. Many of you may have received e-mails in the past 2 weeks, asking you to which voting policy you wanted to align with. So that's becoming bigger, enhanced digital delivery omnichannel and digital communications, which are, we think, really the wave of the future. So all great growth opportunities. Turning to capital markets. That's about a $1 billion business. Looking at the past 5 years, that's grown 14% a year, including an acquisition, of course. And here, the -- we've traditionally played in the back office which is really almost like the SAP of a brokerage firm. But we recently made this acquisition of BTCS, broader trading and connectivity solutions as we've renamed it, which has really positioned us strongly in the front office and to be able to serve our clients front to back. And when we look there at the growth opportunities, it's really around continuing to innovate in the front office and help our clients solve a challenge of bringing together all the different asset classes and geographies they have with a global multi-asset class platform. It's continuing to do that in the back topic where we already have the leading global platform. And it's really driving innovation. We're a leading player in digital to repo, doing a lot on the AI side and a lot of innovation around capital markets. Finally, Wealth, which is just under a $600 million business for us. If you look over the past 5 years, that's been growing at about 10% also. And there, the big thing we've been doing over the past few years is building out a wealth platform first in partnership with UBS, but now we're bringing that to other people. It's a componentized platform across 29 different modules, really helping drive client experience, adviser productivity and digitizing operations. And we think there's a nice opportunity for that going forward. So underpinning that growth model is a very simple financial model. And it starts with organic growth. Historically, we've always talked for the last -- we give 3-year guidance every 3 years, that's logical. And for each of the last 3 periods, I think we said 5% to 7% organic growth. In December, we said 5% to 8%. Then with some tuck-in M&A, talk about 7% to 9% growth in recurring revenues with some operating leverage, we think we can deliver adjusted EPS of 8% to 12%, and that is also the guidance for the next 3 years. And then capital allocation, we're committed to a strong dividend. We have about a 45% dividend payout ratio. We've grown our dividend double digits and 11 of the last -- 10 of the last 11 years, I guess. And so when you think about our TSR algorithm, call it, at the midpoint, 10% earnings growth, plus call it, 1% share buyback, and call it just under a 2% dividend yield. We think we will deliver low teens total shareholder returns over long periods with low volatility and high defensiveness. And that's really the very simple financial model that we're based on. Just a moment on 2024, as we went into the year, we talked about -- we've been in a period of heavy investment. We talked about a return to sort of the Broadridge that many of you who have been investing us have known from the past with 100% free cash flow conversion. And we had confidence as we went into the year about that, but it's good to really see that play out. So we are seeing the free cash flow conversion come through -- we've had a good first half. Just on our earnings call, we reiterated our guidance for the year. And we're also seeing really nice pickup in demand on the demand side and we confirmed our sales goals of $280 million to $320 million. So overall, a very interesting network business model, long track record of success, a lot of opportunity in front of us and we think a good ability to deliver long-term TSR based on a simple financial model.

Terrific. It's a good foundation. I appreciate that. So what do investors that are new to the Broadridge story, maybe not appreciated about the company in a way that you're most informed longest-term shareholders appreciate.

Well, the first thing that I always say to anyone that is brand new to Broadridge is -- when you look at our financials, you see a big chunk of distribution revenue, which is largely pass-through, and you have to really think about all the growth ratios and margin ratios sort of adjusting for that. So that's just 0.0. We have, I think, a really nice roster of long-term investors, many of whom are here. And and we're proud of that. And if you're thinking of getting involved with us, if you look at who our long-term investors are, I think that will give you a good sense of the kind of company that we are. And if you're new to the story, I think the thing that I would just emphasize, and I think that our long-term investors appreciate is that we're a long-term compounder. And that's really based on that market opportunity that I talked about, $60 billion. I can say it again, but that's a growing market. That's just the vended part, the unvended part is significantly above that. And that's the way we run the company. We run the company with a long-term view. We make -- we give the 3-year guidance. We're consistently reinvesting in the company. We're building a culture based on service profit chain, based on -- making our associates very engaged so that they drive great service for our clients, so they drive and buy more things and get good returns to our shareholders. And that flywheel, we think, is very positive and very sustainable.

What is impossible or maybe not impossible, it really hard for competitors to try to replicate about what you do. Because what you do doesn't seem super s**y, maybe to you, it seems super s**y, but it's a lot of the nuts and bolts on mechanics of the capital market system. How is that hard for some to replicate? And maybe you can address both your regulatory communications side as well as your GTO segment.

Yes. And just to reemphasize the person you said, nothing is impossible. And we are very paranoid about competition, and we're very focused on competitive sets and what we need to do to stay ahead of competition and ensure that all of our clients and stakeholders are happy, satisfied and feel really good about the role that we play. I think when it comes down to why is it difficult for people to replicate what we do, on the ICS side, it's really that network that I talked about. It gives us a tremendous position. And I think because of that position, I always like to help people that when they were Broadridge, they are safer and they're smarter. And they're safer because we are continually communicating with the SEC. We're very involved in the regulatory environment. We really know what are all the nuances and how to make sure that we're aligned and are delivering regulatory compliance for them. They're also safer in that same vein because if there is a topic -- it's an industry topic, not a topic that's a Raymond James topic or a Merrill Lynch topic. So they sort of have that protection there. Also safer because of the tremendous investments that we make in resiliency. During the pandemic, one of our main competitors went shut down. We didn't -- we power through also in cyber. And so all of those things make us a really ongoing safe choice for our clients. Now it's not just good enough to be just safer. You also have to be smart. And the smarter comes from a couple of different dimensions. First of all, because of that network and our ability to basically deduplicate unnecessary communications. We can be very cost effective for our clients relative to alternatives, and we can demonstrate to that to them. Here's what it looked like with us. Here's someone else, maybe lower fees, but the total cost of ownership is higher and then also because of innovation. And we're constantly pushing the envelope on what's the next thing? How do we drive a greater digital experience, how do we do all those things? So that combination of Safer Smarter is I think based on that network. And it seems like it's sort of a simple thing, but it is -- what we do is pretty complex. We're taking physicians from the street. We're taking events from public companies. We're taking preferences and consumers, we're housing all that, reconciling it, communicating to people at the right time about event taking back the votes, tabulating those and then providing industry-wide billing for all of that other than in the past, it was every brokerage firm separately billing every public company is a nightmare. So that's the ICS side. On the GTO side, it's also the embedded position that we have. We're serving 20 of the 24 larger fixed income dealers. 7 of the top 10 equity dealers globally. And these platforms are -- it's like an SAP platform. It's really hard to put in and it's really hard to take out. And that embedded position -- when you then provide good service and have people feel good about what you're doing, it really leads the opportunity to do the next thing for them. And the final thing I'd say that goes across both businesses is just that culture thing that I talked about because we take a long-term view. We put our clients first, we reinvest in the business. we innovate and we run our business with the idea that we're going to be doing this for a long time with organic growth and not to say how do we harvest it for the cash flow right now. And there aren't that many people in our industry that are doing that right now.

So we talked about competitive risks. How do you manage through some of the noncompetitive risks where, for example, E-Trade got acquired by Morgan Stanley, Morgan Stanley took some of that business in-house? Or positioning outgrowth can impact the rate of growth in your regulatory communications business, how do you guys manage that as a -- to try to take some of the volatility out of the model?

Yes. I think it's really 2 things. It's -- first of all, it's that recurring model. So our revenue is 94% recurring, and things can happen to that, but it's very, very sticky. And -- so unless there's some industry change, it really doesn't -- it's unlikely to change that much. And then the other side of it is just the breadth of what we do. So we end up talking about a couple of the big things that we do over 200 different -- have over 200 different products. There's a lot of offsets in there when something going to be going positive and one that could be offset by another one or negatively here is offset over there. And so that breadth of what we do and the recurring nature of what we do, I think, gives it quite a bit of sustainability.

So you guys had a slide in your recent Investor Day presentation, where you showed that every year since fiscal 2014, closed sales have contributed 6% to 7% revenue growth for Broadridge. What's driving that consistency kind of year in, year out?

Yes, it is an interesting stat. And thank you for calling it out. We're proud of it. it is a key thing that really underpins our organic growth. And I reflected on that, and as I reflect on that, I think it is really -- it's about how fast we can build supply, which is a bit counterintuitive. But if you think about every business, it is, what's the market opportunity and then how fast can you serve the market opportunity. And I always tell our associates when you look at the $60 billion, look at all the things our clients need to get done that demand for what we do relative to our size and our career relative is basically infinite. So it's really about how do we build the capability to serve that demand. And it is that's complex to do because these are really arcane products. The onboarding is complex. It's not something that just is going to scale up at 20% a year. It really lends itself to that chunking along 6% to 7% a year kind of model. And I think that at route is really the basis of that consistency that we see.

And then maybe just building off of that, what is the innovation process at Broadridge? How much of it is internally driven versus clients coming and say, "Hey, we'd love for you to build this for you, and we'll probably pay for it.

Interesting question, and I think it highlights a few things. First of all, just that innovation is part of our strategy. And it is because we really -- we view every client as a 99-year client. We view ourselves as being in this business for a long time. And so -- it can't be a situation of where we're going to sit on a position and harvest cash flow. It has to be thinking about where is this business going to be in 5 years and 10 years. And how do we how do we make sure that we're ready for that, that our clients are ready for that. And so innovation is sort of part of the mindset of what we do, and that's fundamental. And then what I'd say is it's a mix of internal and partnering with clients, but nothing is purely internal because even an idea that we think, we really say we'll build it and they will come. But if we did think that, it would be based on a whole bunch of market input and sort of what we're hearing from the market. So we're always very -- in with our clients every day, understanding what their pain points are. If we then think about, okay, there are some things where we say -- and I'd say our innovation is a mix of building something ourselves and buying things, which doesn't sound very innovative. It already exists. But if you buy something small and scale it, going to call that innovation. And so we always look at build versus -- we look at where the upcoming needs. We look at build versus buy. For Bill, it would be do we have a platform that's near it. Do we have the market knowledge for Buy is really -- is there a good piece of technology with a good leadership team that has a head start here that we can acquire and bring in-house and help them accelerate. And so we're always looking at that. There are some things where it's built and it's more complex. And when we get in that situation, we always try to partner with the client like we did with Bank of America on corporate actions, for example, which I think again maybe now pursuing. And because if you do it with a client, you know that it's real. And first of all, you do have at least one client, but you also really learned the requirements in detail, and you're not going to build something that's not good for purpose.

Makes sense. So during your interactions with investors and particularly some of your biggest longest-term shareholders that we kind of touched on a little bit earlier, what are they asking of you guys are asking a Broadridge maybe just as important, what are they asking you guys to not do.

Yes. I would say first of all, as I said before, I think we have great long-term investors, and I'm really -- I'm proud of the kind of investors that we have. And I think our investors hopefully, the same way I think of our clients, which is 99-year investors because if we had that long-term compounding, then we can have a long-term partnership with our investors as well. If I think about what our clients are our clients see, I think have investors ask clients, how is that? If I think about what our investors are looking for, first of all, is what I've already talked about, is if they're buying us to be a long-term compounder so make sure that we are running the business to do that, that we're looking ahead that we're innovating, that we're reinvesting in the business, that we're maintaining a great culture, all those things that support that long-term growth. I think what they are not looking for is for us to make big investments that deviate from that model that introduce a lot of risk and introduce uncertainty into what they're doing. Now they want us to go. They want to innovate. They want to do the next thing, but in a manageable consolable way. And I think if you talk to people right now, -- and -- I don't know, maybe I'm projecting because this is what I think. We've made some significant investments in recent years. We need to see those investments pay off. And we're hard at work with that. We think they will. We have seen great success with TCS getting to some momentum on the wealth side, good momentum in digital communications is look at some of our major investments. So you want to see those pay off and they're looking for us to not step too far outside the box, push the boundaries when the opportunity is there. And with that, we have a great long-term view.

And then maybe to build off of that, what are some of the key metrics that you think investors should be looking at from Broadridge to denote that success and kind of what's a reasonable time frame? And I'm guessing you're going to say 3 years.

Yes, exactly. So yes, we are -- we're fortunate to have a fortunate or unfortunate, but we have a very cyclical part of our business in the proxy business. And so it really -- it doesn't make sense to look at our company on a quarterly basis. So we really only makes sense to look at the company on an annual basis. And each quarter, we do update what does the results this quarter mean for the year. But the quarters themselves are less meaningful. And then we take a 3-year view. And in our industry because of how long it takes to change platform, it can switch and the low switching and things like that, it really takes some amount of time for things to develop. So I do think that the most significant thing for investors to look at is how are we doing -- how are we saying we're going to do against our 3-year objectives and around revenue growth and around earnings. And -- if we do that and we continue to have the underlying revenue growth, particularly the organic side, and we continue to drive the earnings that the market may go up, the market may go down, but at some point, that will be valued. I think the other thing is really around is really around capital allocation and what we're doing with the dividend, what we're doing with M&A, what we're doing with share buybacks, and that is all in the balance that we've talked about it or at least if it's in a different balance that we signal that well, and there's a good rationale for that, that the capital allocation and the investors feel that we're doing is one that makes sense for them. And I think if you -- you have the revenue growth, the earnings growth and good capital allocation, you're going to do well over time.

And then speaking of capital, so the capital intensity needs of the business did pick up as you guys were investing in the UBS wealth management platform, along with some other investments that you're making up the time. How would you characterize the capital intensity needs of the business model over some medium-term time frame?

Yes. I think that -- I don't think there's anything that has really changed about a thing broadly a capital-light company. We did make significant investments in UBS, which it's not really UBS, it's in wealth and we're using that same technology internally. And so I am really -- when I look at where we are and how it's positioned to have discussions with clients and how it's positioning us as we evolve our own technology and really glad, we made that investment. I think our investors will be glad over time. So I don't never say never in terms of is that only a onetime thing. But as we look at our business going forward, we think that about 100% free cash flow conversion is about the right place to be. And what that will show then is that will lead to increasing returns on invested capital over time, and we've talked about being -- raising that to the mid- to high teens, which I think we're on good track to do. So I don't really see any significant change since and around the time [indiscernible] .

Well, I think we have about 5 minutes left. I'll pause here and see if there's any questions in the room. All right. No hands being raised, so I will keep going.

Bonus questions.

So in terms of capital allocation, how do you -- what's your framework in terms of sizing the bets that you guys make as a management team? I guess via internal growth initiatives or acquisitions, how do you put guardrails around your investments so that it's not going to disrupt that long-term EPS growth algorithm that you guys are committed to.

Yes. I think we can first, in terms of disrupting the long-term EPS algorithm, it's pretty easy to model things out and see where they're going to come and see if you're going to go outside the bound. So that's pretty easy. I think the bigger thing is, is this a good investment and will get the returns from it. I think, first of all, that question starts with knowing what the size of the investment is. And -- we've done a lot of work on and where -- that's gone off in the past, sometimes when we start a client engagement that we think is on one size and it turns out to be a lot bigger than that, which obviously depresses returns. And so we've done a lot of work around our processes for that to make sure that the size is comes actually what the size we think it will be. Once you have that piece down, it really comes down to, I think, 2 factors. One is what's the attractiveness of the investment? And does it meet not just our hurdles, but is it even more attractive than that. So how attractive is it? It's sort of nice or it's really nice. And how confident are we in execution. And in particular, how confident are we about the leadership team that's going to execute that particular thing. And so based on those 2 factors, you can make a decision. What I would say is that as the size goes up, it gets -- the bar gets sort of domestically higher in terms of how comfortable you feel between attracting this and the ability to execute. And -- but we have full the trigger and some larger things when we had -- we thought it was very attractive and we had a team that we were very confident of, like [indiscernible] And we think -- so you'll see us on all different ranges, but that the bar goes higher definitely in the bigger sizes.

All right. Perfect.